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Ask Lane Your Own Question
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10142
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane, Happy Summer to you. I'm thinking about changing

Customer Question

Hi Lane,Happy Summer to you. I'm thinking about changing my Sole Proprietorship over to an S Corp.What type of protection does that give to me. For example if the company goes under or if the company is ever sued? How much protection does that give me personally?Thanks,Kathleen
Submitted: 5 months ago.
Category: Finance
Expert:  Lane replied 5 months ago.

Hi Kathleen,

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Actually there is no more protction for the S-Corp than the LLC.

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One of the reasons the LLC is the fastest growing entity out there is its hybrid nature (the simplicity and flexibiity of a sole proprietorship/partnership but the corporate liability protection of the corporation).

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An S-Corp is really just a tax election for either an LLC OR Corporation to be taxed more lie a partnership.

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AND the S-Corp comes with the salary requirement, payroll, giving yourself a W-2, quarterly 941's etc., etc.

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I don't typically recommend the S-Corp until profits (over and above a reasonable salary) become so high that the SS & Medicare tax savings become enough to offsett the additional administrative overhead and risk.

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As an LLC member you pay 15.3% on the schedule SE on your profit. As an S-Corp employee/shareholder you pay 7.65 through your salary withholding and the the S-Corp (you) pay another 7.65.

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It's only on provits ABOVE the salary (and other expenses) flowing through the K-1 that there's any tax savings (none on federaal, but on the payroll taxes - social security and medicare)

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And again, that comes at the cost of the additional overhead of the S-Corp (quarterly 941's paying in fica at least monthly, W-2, etc - tax risk of NOT doing that.

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The corporate liability protection comes from the underlying LLC or Corporation.

Expert:  Lane replied 5 months ago.

P.S.

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I have always believed that the propensity for CPA's and others who make their bread and butter from doing payroll to recommend S-Corps (even when the profitability is not high enough to generate any payroll tax savings) is not UN-related.

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I hope this has helped. … Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit")

JustAnswer will not credit me for the work unless you do.

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Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

Customer: replied 5 months ago.
Thank you Lane. I recall someone telling me a long time ago that an LLC member can only be liable financially up to the amount they have financially invested into the LLC, is that correct?The reason I am asking is because I want to grow my company, but if it fails I don't want to be held personally responsible for the liabilities if it were to fail. I didn't know if there was a way to protect my personal assets from that?On a completely different subject matter....one of my clients paid out a Legal Settlement to an old employee that they owed Vacation Time to. Is that deductible, and if yes do I deduct it under Payroll?Thanks,Kathleen
Expert:  ABC Accounting Group replied 5 months ago.

Hi. You are not personally liable as an s-corp. Sole Proprieter, you are.

Customer: replied 5 months ago.
I'm sorry, but how did my question get switched from Lane to you?
Expert:  ABC Accounting Group replied 5 months ago.

I think so. They can look for Lane, if you want

Expert:  ABC Accounting Group replied 5 months ago.

Not sure what happened. I will let Lane respond - it must be a system error

Customer: replied 5 months ago.
Lane are you there?
Expert:  Lane replied 5 months ago.

Sorry Kathleen, yes the corporate liability you speak of (liable only up to your invesment IN the entity) is a product of the LLC or the corporation.

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Again this is state law (all corporate law is state law).

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The S-Corp is not in of itself an entity ... the S-Corp is a tax election FOR and underlying LLC or corporation.

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So electing S-Corp taxation provide NO additional liability protection. That was already there, by virture of the LLC ... and would also be there for the regular corporation (sometoimes referred to as the C-Corporation).

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And on your second question ... yes if this was a busines expense (or a settlement paid in lieu OF a business expense) it's certainly deductible ... I would create a separate entry for it, for record-keeping purposes, but showing it as payroll certainly has the same mathematical/tax effect.